“A full-throated defense of economic dynamism.” - The Wall Street Journal
“Unintended Consequences provides a provocative interpretation of the causes of the global financial crisis and the policies needed to return to rapid growth. Whether you agree or not, this analysis is well worth reading.” - Nouriel Roubini, New York University; Chairman, Roubini Global Economics
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“Unintended Consequences should be read by anyone who takes for granted the superiority of progressive taxation and has not thought carefully about the trade-offs involved.” - The New Republic
“…a very valuable contribution.” - Larry Summers, former Secretary of the Treasury and director of the National Economic Council, president emeritus, Harvard University
“…a fresh argument for the productive value of inequality.” - David Autor, Professor of Economics, Massachusetts Institute of Technology
“…a comprehensive explanation of the modern economy.” - Julian Robertson, Founder, Tiger Management
“Unintended Consequences represents the most cogent and persuasive analysis of the Financial Crisis to date.” - Andrei Shleifer, 1999 John Bates Clark Medal Winner
“Unintended Consequences offers deep and well-argued analyses on almost every issue.” - The New York Times
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Trading Stages in the Company Life Cycle

Michael Mauboussin and Dan Callahan Morgan Stanley

Date Posted:: September 27, 2023

The spread between return on invested capital and the weighted average cost of capital is highest early in a firm’s life cycle and then declines until late in a firm’s life cycle. @mjmauboussin

We examined the spread between return on invested capital (ROIC) and weighted average cost of capital (WACC) for companies that did an initial public offering from 1990 to 2022. We expected to see low or negative spreads between ROIC and WACC for companies newly listed, rising spreads as they mature, and a decline in senescence. But what we found was nearly the opposite. The spread at the date of the IPO was high and narrowed before stabilizing around year five.

Globalization and Profitability of US Firms: The Role of Intangibles

Bullipe Chintha, Ravi Jagannathan and Sri Sridhar National Bureau of Economic Research

Date Posted:: March 6, 2024
Is Database:: Database
Is Important:: Important

During 2003-19, the mean EBIT margin of US public companies increased by 11.5% vs. 1984-2002, driven by a 47.4% increase in foreign profitability for S&P 500 firms, while domestic profitability remained flat.

We find that the overall profitability of US firms as measured by the ratio of aggregate Earnings Before Interest and Taxes to aggregate Sales (EBIT Margin, EBITM), increased significantly following increased globalization heralded by China’s entry into WTO in December 2001. We find that the increase in EBITM is driven primarily by the increased foreign profitability of S&P 500 firms, which are larger and spend significantly more on R&D than firms not in S&P 500 index (ex-S&P 500) and have greater intangible intensity than ex-S&P 500 firms. Even among S&P 500 firms, those firms that had higher intangible intensities as measured by higher R&D/Sales and Intangible Assets/Sales ratios had higher increases in their foreign profitability. Neither S&P 500 nor ex-S&P 500 firms experienced any increase in their domestic EBITM following increased globalization, consistent with increased import competition. In the aggregate, the average annual profitability of US public firms in 2003-2019 increased by 11.5% of 1984-2002 profitability. This increase was primarily driven by foreign profitability increasing by 47.4% for firms in the S&P 500 index, which are larger and have more intangible assets created by R&D and SG&A expenditures.

US Capital is Depreciating Faster

Timothy Taylor Conversable Economist

Date Posted:: September 27, 2023
Is Database:: Database
Is Important:: Important

US net investment has declined from its 1950-80 average of 10% of GDP to 5%. @TimothyTTaylor argues that the cause is increased investment in information technology that depreciates more quickly than plant and equipment.

Gross investment has typically been 20-25% of GDP over time, although in recent years it’s been closer to the lower end of that range. From the 1950s up into the 1980s, net investment was (very roughly) 10% of GDP. Thus, it was plausible to say that in a typical year, a little more than half of gross investment went to replace capital that was wearing out, and a little less than half of gross investment was actually new, net investment growing the capital stock. But in the last decade or so, gross investment has been about 20% of GDP, and net investment has fallen to about 5% of GDP. In other words, gross investment as a share of GDP has fallen a bit, but not too much. The real change is that about three-quarters of investment is now going to replace capital that has worn out, so net investment is much lower.

The spread between return on invested capital and the weighted average cost of capital is highest early in a firm’s life cycle and then declines until late in a firm’s life cycle. @mjmauboussin

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During 2003-19, the mean EBIT margin of US public companies increased by 11.5% vs. 1984-2002, driven by a 47.4% increase in foreign profitability for S&P 500 firms, while domestic profitability remained flat.

Related Articles:

US net investment has declined from its 1950-80 average of 10% of GDP to 5%. @TimothyTTaylor argues that the cause is increased investment in information technology that depreciates more quickly than plant and equipment.

Related Articles: